Altria(NYSE:MO) is a consumer goods giant with a growing dividend and a huge 7.4% dividend yield. That seems like a big opportunity for income investors, considering that the S&P500 yields only 1.2% and the average stock of consumer goods only 2.5%.
But before you rush to buy Altria, there are a few things you should know.
A 7.5% dividend yield is big, and it wouldn’t be shocking for an income-oriented investor to think it could last a lifetime. That’s especially true since the dividend has been steadily increasing, growing at about 4% per year over the past five years. That’s slightly higher than the average rate of inflation growth over time (which is closer to 3%, despite the recent rebound). So from an overall perspective, Altria appears to offer a large upfront revenue stream, which also increases purchasing power over time.
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Then there is the company itself, which operates in the consumer staples sector. Consumer staples stocks sell things that are purchased frequently, and demand for these products is generally unaffected by economic fluctuations. The sector is generally considered a good place for conservative investors to fish for investment ideas due to the generally consistent business performance of the sector’s voters.
As for Altria’s business, it owns the largest high-end brand in the market it targets. That brand is Marlboro, which has a nearly 42% market share in North America, the company’s largest market. However, this is where some negative points emerge as Marlboro is a cigarette brand.
As a tobacco company, Altria faces a number of unique threats that other consumer staples companies, such as food manufacturers and consumer products companies, do not face. And cigarettes are particularly in the crosshairs of regulators for both their addictive nature and the health risks they pose to those who smoke. Smokable products represent about 88% of Altria’s sales, and cigarettes account for about 98% of volume in the company’s smokable products division.
To make matters worse, Marlboro, although an important and dominant brand, accounts for about 90% of the cigarettes Altria sells. This means that Altria is heavily dependent on just one product and brand. If something were to go wrong with that product and brand, it wouldn’t be a good thing.
And things aren’t going well. Cigarette volumes fell 10.6% year-on-year in the first nine months of 2024. In 2023, volumes fell by 9.9%. In 2022 the decline was 9.7%.
The company has compensated for this continued volume decline by raising prices. That has worked so far and could continue to work for a while, but at some point the price increases will likely make the declines worse. And it hasn’t had much success finding a replacement product, with costly write-offs associated with investments in vaping and marijuana. A second foray into the vaping sector, with the purchase of NJOY, appears to be going well, but the company is small relative to its cigarette business.
Altria’s business seems to be heading towards an abyss. Currently, despite negative volume trends, growth is stabilizing due to price increases. At some point, the cigarette industry will likely reach an inflection point and enter a downward spiral, with said volume declines becoming increasingly worse. Given this trend, it seems unlikely that Altria is an investment that can be purchased with the expectation of creating an income stream that will last the rest of your life.
It’s entirely possible that management will find a way out of this situation, perhaps with NJOY, but at this point it’s not clear that will happen and the clock is ticking loudly. Altria is a high-risk income stock that probably only the most aggressive, active investors should consider.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is buying Altria stock today good preparation for life? was originally published by The Motley Fool
